What is VAT?

VAT is a tax you pay when you buy goods and services in the European Union, including in the UK. If you have to pay VAT on something it will normally be included in the price you see on the shelf. In some circumstances you might be able to get a refund of any VAT you have paid, for example if you live outside the EU and are visiting the UK.

What is the rate of VAT?

Each EU country has its own VAT rate, and in the UK there are three rates. The standard rate is currently 20% and applies to most goods and services. A reduced rate of 5% is payable on items such as children's car seats and gas and electricity for your home, and there is a zero rate too.

What items do we pay zero VAT on?

There are a few categories of goods and services that do not attract VAT:

• Basic or staple food items, but not meals in restaurants or takeaway meals

• Books, newspapers and magazines

• Children's clothing and shoes

• Sanitary protection such as pads and tampons

• Public transport fares

• Installation of energy-saving materials

• Some goods provided in special circumstances, for example equipment and vehicles for disabled people such as stair lifts and grab rails

There are also VAT exemptions on medical grounds, such as wigs worn for medical reasons including hair loss through alopecia, chemotherapy or any other medical condition.

Is there anything else not covered by VAT?

There are some items that are either "exempt", such as insurance and membership subscriptions, or deemed to be outside the scope of VAT. Included in the latter would be the proceeds of selling stamps from your own private collection, and fees which are fixed by law – known as "statutory fees" – such as the congestion charge or vehicle MoT tests.

Does the pasty tax U-turn mean hot food is VAT-free?

No. Takeaway meals like fish and chips will continue to attract VAT, and although the "pasty tax" will be reversed there will still be situations in which consumers have to pay more to have a warm snack like this. If hot takeaway food is cooling "naturally" in glass cabinets or displays it will not be subject to 20%, as had been originally planned. But food being deliberately kept warm under lights or on hot plates will be subject to the tax.

While we're talking about VAT, what's the deal on Jaffa Cakes?

Perhaps the most infamous VAT product, the Jaffa Cake was at the centre of a challenge over its status. Despite its name, the product is usually found in shops alongside biscuits. But in terms of VAT, HMRC stipulates that biscuits attract the tax while cakes – oddly, as a "staple" item – do not. Jaffa Cake manufacturer McVitie's went to court to establish its right to avoid charging VAT on its product and won. Its clinching argument was that Jaffa Cakes, unlike biscuits, go hard when they are stale, which means they are a cake. Of course …